Is the time right for Reliance Capital to hunt for partner for insurance business?

Suman Layak | Wednesday, May 1, 2013 | 20:27 IST

The Anil Ambani-led company has been going through a rough patch for some years. A few months ago, it was hammered at the bourses all over again. So, is the time right to hunt for a partner for its general insurance business?

Anil Ambani's Reliance Capital has been going through a rough patch for some years. A few months ago, just when it seemed to be recovering, it was hammered at the bourses all over again.

Last December, Bhavesh Kanani, analyst at Centrum Broking, hailed the Reliance Capital stock in a report title Phoenix Rising Again. At the time, the share price had risen to Rs 436 per share. On January 7 this year, the company's share reached a one-year high of Rs 508. But immediately afterwards, its stock began to tumble and is currently at Rs 352.40 per share (April 30) with market cap at around Rs 8,656 crore.

So, is this the right time for the company to hunt for a partner for its general insurance business?

"We are looking for either a foreign insurance major or a private equity major which has invested in other general insurance companies and can bring in expertise and collaboration," says CEO Sam Ghosh.

How hopeful is he of getting a good deal - a partner which infuses a healthy dose of capital for a reasonable equity share? Ghosh does not appear to be unduly perturbed by the recent slide in stock price. "All our businesses are making profits."

The general insurance business is one of its smaller constituents, contributing only 4 per cent to the parent's valuation. Its success, however, in attracting a partner will be a vital pointer to Reliance Capital's current market standing.

After all, despite their tribulations, both Reliance Life Insurance and Reliance Capital Asset Management managed to attract investment from Japan's second largest insurance company, Nippon Life Insurance (NLI).

The two companies raked in about Rs 4,512 crore from NLI for a 26 per cent stake in each, the first in March 2011, the second in January 2012. At the price NLI paid, the combined valuation of just these two companies would be Rs 17,500 crore - more than twice Reliance Capital's entire current worth.

Will the general insurance business too pull off a similar coup?

NLI has made it clear it will not be a partner in the general insurance business, since it no longer has one of its own. Nevertheless, the NLI association with Reliance Capital is bound to help RGICL.

DIVERSE BASKET

Reliance Capital has its fingers in different financial pies:

Life Insurance

50 per cent

Asset Management

21 per cent

Commercial Finance

15 per cent

Investment

8 per cent

General Insurance

4 per cent

Broking, distribution

2 per cent

As it is, the valuations, especially that of the asset management firm, surprised the market and boosted Reliance Capital's position. Ghosh also reveals that NLI has provided Reliance access to latest technologies and work practices, apart from getting Reliance Life Insurance business from Japanese firms and Reliance Capital Asset Management, equity funds to manage.

The other positive for RGICL - and indeed for all other private insurance companies - is that the system of 'pooling' motor insurance claims, initiated by the insurance regulator in 2007, was disbanded in March 2012.

The earlier system, in which a motor insurance claim, made to any insurance company, had to be shared by all, public and private, in proportion to their market share, was a big drain on private companies' resources.

"We had Rs 63.50 crore worth of liabilities when the pool was abolished," says Rakesh Jain, CEO, RGICL. "By the end of 2013/14 we will have paid it off. From 2014/15, with the motor liabilities exhausted, we will see much better profits."

Another litmus test of Reliance Capital's position will be whether it is able to get a banking licence. Such a bank would also enable Reliance Capital to have a banking partner selling both its life and non-life policies, which it does not at present.

Finally, the fact that foreign players can only hold 26 per cent stake in Indian insurance and must perforce find an Indian partner, is bound to help RGICL in its search.

"Low insurance penetration in India, as well as a growing middle class are large attractions for global players," says Atal Agarwal, Royal Bank of Scotland's Managing Director for Financial Institutions.

And with public sector behemoths still dominating the market, RGICL is as good a proposition as any other. "Most private players in Indian general insurance have a market share of two to four per cent," says Vinod Wadhwani of Ambit Pte. "There is hardly any difference between them as viable targets for potential global partners."